A Tale of Two Lending Markets

Wed, 2012-08-29 14:09

Commercial and multifamily mortgage lending rose in the second quarter of 2012, according to the Mortgage Bankers Association, which attributed the rise to low interest rates and continued stabilization and growth in the commercial real estate markets.

Speaking specifically to multifamily, government sponsored entities Fannie Mae and Freddie Mac continue to provide stable, sensible non-recourse permanent financing solutions for today's borrowers. According to the MBA's recent Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations, lending on the part of government sponsored enterprises Fannie Mae and Freddie Mac showed a 50% increase from one year earlier. Multifamily lending, as a whole, increased 19% year-over-year.

Currently, multifamily borrowers are seeing some of the lowest fixed rates in history for lower loan-to-value transactions, locking in 10-year rates that begin at 3%. And with one-month LIBOR holding at less than 30 basis points since May 2009, floating rate borrowers are seeing equally low levels.

With rates this reduced, borrowers are now willing to swallow prepayment penalties in order to lock in historically low rates. For instance, well-heeled borrowers in New Jersey are now much more willing to pay a yield maintenance penalty – essentially a form of pre-payment penalty. This means that the lender is entitled to the yield for the entire length of the loan, which has resulted in penalties in the range of 20% (or more) of the loan value.

More importantly, we have seen an interesting dichotomy emerge in the lending market over the past several weeks between agency pricing and life company pricing for lower loan-to-value transactions. In the past, life companies were able to cherry-picking the business they wanted. But this isn't necessarily the case any longer, namely because their rates are now subject to a floor - a rate at which they will not go below. Over the course of the past year, life companies were assuring their policyholders 5.0% rates, but could only lend out at around 4.0%, making it difficult to pay their promised rates. This led to the implementation of a floor anywhere from 3.5% to 4.0%.

In truth, life company rates are priced (in terms of spread) as well if not better than the agencies, but Fannie Mae and Freddie Mac will not put in a floor, making them a much more attractive option at the moment. Treasury market fluctuations do affect final pricing with these two lenders.

It will be interesting to see how the relationship between agency and life company lending plays out over the next few months. Interest rates will also continue to be carefully monitored. Can they go lower? Sure. But that is not necessarily a good thing. Change in the interest rate level is ultimately what drives the level of transactions.

Also on the banking industry's radar is how the LIBOR scandal progresses (or fizzles) in the coming weeks. The London inter-bank lending rate is considered to be one of the most crucial interest rates in finance. It underpins 40% to 50% worth of loans and financial contracts in New York City alone. Just who has a say in defining the replacement rate will be an important distinction in the coming weeks.